South Florida has long been home to retirees and wealthy individuals who move to the region to enjoy the beautiful weather, excellent quality of life and, of course, favorable state income tax laws. Many of these South Floridians rely on their investment portfolios as their primary source of income, so it is important for investors to understand the nature of the relationship they have with the financial professional who manages their money.
Most investors are unaware that, when it comes to financial advice, there are currently two different standards of care under the law. Brokers, many of whom have arguably misleading titles like “financial adviser” or “wealth adviser,” have the lower of the two standards of care, known as the suitability standard. Brokers must merely recommend suitable investments, which leaves the door open for them to put their own interests ahead of their customers. This issue is made worse by sales practices at some brokerage firms, like sales contests that focus on particular financial products, or commission and revenue-sharing incentives that may steer brokers in the direction of certain funds over others, often without adequately disclosing these practices to their customers.
On the other hand, registered investment advisers are firms that are held to a higher standard of care. The advisers at these firms, legally referred to as Investment Adviser Representatives, have a fiduciary obligation to act in their clients’ best interests, and to mitigate and disclose conflicts of interest. The obligations of a fiduciary go far beyond the standards imposed on brokers, and may result in portfolios that have lower product costs and are better-aligned with the client’s interests and goals.
The challenge for investors in South Florida, where there is a wealth management firm on every corner, is that it can be difficult to tell whether you are dealing with a broker or with an investment adviser. Brokerage firms and banks have created much of this confusion by giving their personnel titles that misleadingly imply a greater obligation to their customers than is in fact the case (titles such as “wealth adviser” and “financial adviser”).
In an effort to address this issue, the U.S. Securities & Exchange Commission recently proposed a rule, referred to as Regulation Best Interest.
The proposed rule is well-intentioned and the SEC should be commended for taking a step in the right direction, but I believe that the proposal falls short of truly protecting the investing public, and may cause even more confusion among investors. The proposed rule would require that brokers act in their customer’s best interest, but only at the time they actually make an investment recommendation. The broker does not have an ongoing obligation to monitor the recommended investment and ensure that the recommendation continues to be appropriate for the customer.
The SEC has specifically stated that this proposed rule does not create an ongoing fiduciary duty for brokers, meaning there will still be a lower standard of care owed to customers of brokers relative to clients of investment advisors. Ask yourself: Am I comfortable with the idea of working with a financial professional who has the lower standard of care?
Additionally, while the proposed rule would prohibit brokers from calling themselves “advisers,” it would not ban the use of other ambiguous titles like “wealth manager” or “financial consultant.” These confusing titles will continue to proliferate within the brokerage and banking industry and cause further confusion for investors seeking to understand the true nature of their relationship with a financial services professional.
In short, if you’d like to know whether your financial professional is a broker or an investment adviser, ask them one simple question: Do you owe me a fiduciary duty at all times? And make them put their answer in writing. Their response might surprise you.
David Savir is co-founder and CEO of Miami-based Element Pointe Advisors, LLC, a wealth management and family office advisory firm serving high net worth clients.
▪ This is an opinion piece written for Business Monday in the Miami Herald. The views expressed do not necessarily reflect those of the newspaper.
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